CANADA’S GDP CAME BACK TO EARTH IN 2017 ...
... and, as Gordon Isfeld explains, it looks like it will stay there while rates rise
Canadians shouldn’t be surprised if economic growth continues to moderate during 2018 and into the next year, if not farther out. Nor should a steady uptick in interest rates, in tandem with the milder-but-steadier growth trajectory, come as a shock.
Both those trends, after all, began to take root midway through 2017.
What may not be as evident, according to some of the country’s top economists, are the longer-term effects of tighter domestic housing regulations and shifting global trade policies, both now in a state of flux.
“This was a highly unusual year for the global economy, with heightened political uncertainty accompanied by strong financial market performance and accelerating economic growth,” said Craig Wright, senior vicepresident and chief economist at RBC Economics Research.
“Canada’s robust growth in 2017 is likely to moderate somewhat in 2018 as key economic drivers shift, but we still anticipate the economy will continue to outperform its potential.”
A notable shift in the economic landscape will see infrastructure activity and rising business spending play a more dominant role next year, taking on some of the heavy lifting from consumers and a still-strong housing market, according to Wright.
“Government spending on infrastructure and a moderate increase in business investment, which began to recover in 2017, are forecast to support economic growth next year,” RBC noted in its end-of-year forecast.
Exports are also expected to gain momentum next year, even though major U.S.-driven changes to the North American Free Trade Agreement have “the potential to stymie both exports and investment.”
The housing market, meanwhile, “finally entered the early stages of a cooling phase in mid2017 after the impact of changes to regulations and rising interest rates took root. Housing resales and ancillary purchases are forecast to slip in 2018.”
All of this is evidence that following
a high-flying first half of this year, Canada’s GDP is coming back down to Earth.
An estimated three-per-cent expansion overall in 2017 — driven by an out-sized first-half growth spurt of more than four per cent — will likely be followed by slower output of 2.1 per cent next year.
“We don’t expect the economy to settle into a trend pace until 2019,” TD Economics said in a year-end analysis.
“Rising interest rates, elevated (household) indebtedness and (tighter) macro-prudential measures will conspire to moderate residential investment and consumer spending, gradually nudging the economy back towards its long-term cruising speed.”
Most economists believe that cruising speed should be around two per cent or slightly higher.
Setting and maintaining that course will be the Bank of Canada’s prime responsibility.
Governor Stephen Poloz and his monetary team will need to remain in what they call “intense data-dependent mode” — one that “requires confirmation of ongoing inflationary pressures to support further rate hikes,” TD said. “Our forecast sees the Bank of Canada’s key criteria being met, bringing the overnight rate to 1.5 per cent by end-2018” from the current one-per-cent level.
Most economists would agree. After all, it has been a gradual seven-year slog from a 0.5-percent benchmark rate to the first upward adjustment — by 25 basis points — in July of this year. That was followed by an increase of equal measure in September. Now at one per cent, rates are again stagnant.
That will change soon, if Poloz can shake off some of the concerns that, as he acknowledged in a speech last week, keep him “awake at night” — such as record-high home prices and household debt, lagging youth employment and cyber threats. Limiting those concerns remains a work in progress.
For the immediate outlook, Poloz said central bankers are “doing our part to help bring about a strong and stable economy.”
“We will continue to be cautious in our upcoming policy decisions, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.”
The Bank of Canada will update its economic forecasts in the quarterly Monetary Policy Report on Jan. 17, which will be accompanied by the latest interest rate decision and followed by a news conference in Ottawa with Poloz and senior deputy bank governor Carolyn Wilkins.
Most economists do not expect a rate change during the bank’s January meeting. A March or April rate adjustment is more likely, giving the bank more time to digest any changes in domestic and global economies.
“I think, from the big picture, the slowdown we’re looking for (comes) from a pretty robust pace. I believe we’re pretty close to consensus, looking at growth of just over two per cent — but that’s still above what the Bank of Canada would consider to be potential and what most of us would consider to be potential,” said Douglas Porter, chief economist at BMO Capital Markets.
“Even though the economy will be slowing, we still think the unemployment rate is likely to fall further next year — and that means we’re going to be pushing up against the lowest unemployment rates in decades in this country,” Porter added. “Even modest growth will get us there over the next year.”
But dark clouds could dampen Canada’s growth outlook.
“I believe NAFTA is the No. 1 risk for the Canada economy in 2018,” Porter said. “We are concerned that at the very least ... uncertainty will weigh a bit on growth. And there is the possibility of things going quite awry ...”
Another concern is the long negotiations following the referendum results of the June 23, 2016 vote that supported Britain’s exit from the European Union.
“We suspect it’s going to be a soft Brexit. I don’t think the hard-line Brexiteers are going to be happy at the end of the day . ... The only question is what kind of trade deal the U.K. works out with Europe,” he said.